Friday, February 11, 2011

Disappearing Bank Bonds

The vernacular has seen phrases like “burn the bondholders”, “take a haircut” and “ordered default” enter into common use. We have given some time to tracking the changing patterns of deposits in Irish banks since the guarantee came into force. Here we will give some consideration to the quantity of bonds issued by Irish banks.

Again the Central Bank data we are examining relates to the 20 domestic banks in operation. When trying to infer the relation to the guarantee and liabilities of The State it is difficult to draw exact conclusions as we do not know how much of these figures relates to the six institutions covered by the guarantee. We may not be able to draw exact conclusions but can infer fairly broad patterns as the guarantee covers the biggest of the domestic banks.

The graphs here are of debt securities issued by domestic banks. Here is the Central Bank definition of debt securities which includes more than just bonds.

Debt securities issued comprise funds received in exchange for non-equity debt securities issued by the reporting institution. Such instruments are usually negotiable and traded on secondary markets, and do not grant the holder any ownership rights over the issuing institution. All non-equity bearer securities which have been issued by resident credit institutions are included here, e.g., all commercial paper, certificates of deposit, notes and bonds which have been issued.

A breakdown by the type of securities is not provided but we will work with the numbers as they are. Here are the total amounts issued with the period after the bank guarantee to the right of the vertical dashed line.

Prior to the guarantee in September 2008 the quantity of bonds was beginning to decline. This continued up until the summer of 2009 after which there was a stabilisation, and even a slight increase, in the bonds in issue. By April 2010 there was €111 billion of bank bonds (actually €6 billion more than in September 2008), but by the end of 2010 this had fallen to €64 billion – a drop of over €47 billion. Most of this money was fully repaid.

So who got the money? The Central Bank breaks the total down by Irish, Other Eurozone and Rest of the World residents.

The biggest drop has occurred for bondholders from the rest of the world which stood at €74 billion in August 2008 and has dropped (or been repaid) by such an extent since the guarantee was introduced that it is now down to €20 billion. A drop of €54 billion since August 2008. As late as last August there were €41 billion of bonds held by rest of the world residents but there was a reduction of €17 billion in September.

Irish residents have seen their holdings of Irish bank bonds rise from €25 billion at the time of the guarantee to €45 billion in April 2010. Since then, these too have fallen and were down to €33 billion by December. The proportion of bond held by Irish residents has been rising since the guarantee was introduced and now stands at just over 50%. Are we going to burn ourselves?

Since the guarantee holdings of Irish bank bonds by other Eurozone residents has fallen from €17 billion to €10 billion. This would hardly leave a ripple on the European banking system. This would similarly apply to the €20.5 billion held by residents of the rest of the world. Non-payment of the €33 billion owed to Irish residents would be far more significant.

As with the fleeing deposits the money to repay these bonds had to be found. Again it is likely that the banks banks turned to the ECB (€94.5 billion) and the ELA of the Irish Central Bank (c. €50 billion). This a different sort of liability and one for which any kind of default would prove difficult. As time progresses (and more bonds are repaid) the mantra of “burn the bondholders” or equivalent becomes ever less relevant. It still has some scope to play a role but pretty soon it will be the country they are setting on fire. All the other fuel will be gone.